MR. DRAGHI YOU ARE PUTTING CART BEFORE THE HORSE

I don’t think it’s too late to write about the recent European monetary policy, the most predictable one till date. The only surprise was that the interest rates will not be cut further and with that reassurance by Mr. Draghi, Euro recovered after falling 1.3%. I don’t know whether that was a warning or a request. Warning that, that is all that we can do and request to the European governments to do something substantial. For the markets, Mr. Draghi unleashed a substantial stimulus package by cutting the rate on cash parked overnight by the banks to negative 0.4% and its benchmark rate to zero. Don’t forget the bond purchases which have been increased to 80 billion euros.  So this was what Mario Draghi meant by ‘Whatever it takes to preserve the EURO’, three years ago. But Sir how long will you keep doing that. The markets also understood that and as a result, Euro depreciated and the stock markets jumped. 

Now what if inflation does not edge towards designated target of 2% which right now is around minus 0.2%  I don’t think they would have solution for this especially with US following completely divergent monetary policy and China slowing down which is hurting European Union’s exports. So there is no guarantee that this stimulus will feed into the real economy fostering growth and though banks will be provided with a series of long term loans, their profitability will be hindered by negative interest rates imposed by ECB. What should be done to avoid getting deeper into deflation, the same solution that even we have to follow, structural changes, overhauling of infrastructure, being business friendly. Even Mr. Draghi has asked respective European governments to take up these challenges as in the long run with double digit unemployment rates, high corruption levels, unstable financial environment, migration issues and cultural clashes even birds of the same feather may not flock together.